Saudi Arabia Bankruptcy Law Set to Help Businesses
Saudi Arabia Government signals the green light to implement the approved bankruptcy law. This is a great step towards revolutionizing good business practices.
At present Saudi Arabia Government are focusing its energies towards Saudi Vision 2030 and the National Transformation Programme (NTP), improving and developing its economy, branching away from reliance on the oil sector and increasing the level of private sector business participation.
There have been a number of strategies designed to modernize the current systems in place for doing business in the Kingdom. The driving force is to boost the economy, streamline business practices and attract foreign investors to setup a company in Saudi Arabia.
The United Arab Emirates introduced the bankruptcy law in 2016 to better deal with corporate insolvencies, it was only a matter of time that Saudi would follow suit. Formerly neither country had a law in place to aid businesses that came into financial difficulties. Since there has been an economic slowdown worldwide this is another strategy in place to boost the economy for Saudi Arabia.
Saudi Arabia’s bankruptcy legislation was initially published in February 2018 – Majed Al Rasheed, secretary general of the bankruptcy committee at the Ministry of Commerce and Investment (MOCI), has declared this law will come into effect within the next few weeks.
KSA bankruptcy law update is very much needed to strengthen the system. Investors need to feel protected and aware of their rights and obligations should they run into any financial difficulties.
The lack of a fit-for-purpose insolvency system has been a major concern for business advisors, investors, entrepreneurs and corporations that are looking to expand or start a company in Saudi.
Below lists some of the problems that those doing business in KSA have previously encountered:
Unsystematic collection of debts whereas some creditors have received payment and others have completely missed out
Less opportunities for arrangements and as a result both creditors and debtors have been disadvantaged
Reduced prospects of survival for a company undergoing a brief setback
Insufficient or no information regarding an intended counterparty that was or is currently in debt
Many large lawsuits resulting from a range of legal claims (often a feature of several corporate insolvencies in KSA)
Debtors trying to overpower creditors’ dues such as hiding assets or disposing of assets prior to insolvency at a lesser or to no value at all.
There has not been enough effective protection for a debtor whose company is undergoing financial hardships, yet they still remain financially viable. Where there are several creditors there may be no opportunity for the same debtor to trade their way out of those struggles and repair the financial health of their company. On the other hand, preserving the company in some form may be suitable for most of the creditor in particular small creditors – even if it means getting less than their due. The new bankruptcy law will strengthen KSA’s business environment by helping cash strapped organizations restructure and encourage more foreign investment. As a result, we expect to see more companies looking to tap into the market and form a company in Saudi Arabia.
Saudi’s bankruptcy law includes many aspects of a western styled insolvency regime displaying a greater bench-marking process. Moreover, the new law clears up certain issues that creditors face when dealing with insolvent debtors.
THE NEW BANKRUPTCY LAW AIMS TO:
Set trust in the credit market and commercial transactions
Support a bankrupt debtor that is likely to experience financial issues to reorganise their financial position, resume their activities and contribute to economic help and improvement
Look after businesses and prevent them from collapsing
Consider the size of the company during the bankruptcy proceedings
Identify and set out certain procedures for small and large debtors
Make certain impartial consideration of creditor’s rights with equal treatment
Increase the countries position as an appealing destination for investment
Reassure companies about their stakeholders and creditors
Ascertain a bankruptcy committee in relation with the general authority for SME’s
Get the most value on the sale of assets in bankruptcy proceeding and to guarantee reasonable allocation to all creditors at the time of liquidation
Lessen the time and reduce the cost of legal procedures and improve their effectiveness
Supply a simplified liquidation of debtors whose assets, that are not sold, are not likely to meet the expenses of liquidation
THE NEW BANKRUPTCY LAW APPLIES TO:
Regulated organizations such as insurance companies, bank institutions and telecommunications companies.
Corporations or persons performing or carrying out professional, commercial or for-profit businesses in KSA
Non-Saudi (foreign) investors that have assets in Saudi Arabia or carry out professional, commercial or for-profit business via a registered licensed entity.
Improving KSA’s business regulatory environment is a key force of Vision 2030. Officials have already revised several commercial laws and introduced new laws to offer increased protection to investors.
The bankruptcy law sets out regulations for insolvencies, preventive proceedings, courses for financial restructuring and settlement processes. Additionally, borrowers and creditors can reach restructuring solutions much easier, speed up the liquidation of non-viable businesses and reduce the risk for lenders.
The bankruptcy law is a positive and important development for Saudi Arabia. We predict it will only be a matter of time before we see further legal structures in line with global standards. We are excited to see what is in store for the Kingdom.